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Tax Debts are an Important Element of Proper Bankruptcy Planning

blue piggy bank that reads tax debt

The author of the expression that “nothing is certain but death and taxes” never spoke to a bankruptcy lawyer.  Contrary to what many think, taxes under certain circumstances can be discharged and eliminated in a Bankruptcy filing.

This area of the bankruptcy law is one of the more complex and difficult areas and should not be attempted without qualified counsel advising every step of the way.  For every rule, there are exceptions and many Courts over the past several years have interpreted the law to narrow the opportunity as well.   Very simply stated though, personal income taxes which are more than three (3) years old from the date which they were due (plus filing extensions), two (2) years after any late filing of the returns and more than two hundred and forty (240) days after any additional assessment, can be discharged in bankruptcy like any other general unsecured debt.   A return filed by the IRS (called a “substitute for return”) has been held by some courts recently to not be subject to discharge at any time.

These rules can be further complicated by what are called “tolling events” which would preclude the IRS or state taxing authority from collecting the debt in the preceding years.   This could be a “due process hearing” with the IRS or an appeal of an Offer and Compromise, or a prior bankruptcy filing.    This is why a thorough review of the IRS “Account Transcript” or complete tax history from the State is required prior to filing a bankruptcy petition.   A petition filed one (1) day too early could deprive a debtor of substantial tax relief.   Likewise, a filed tax lien could complicate matters and make the potentially discharged debt into a secured lien against real estate or other personal property if existing.

Since this is tax season and many people are in fact dealing with tax issues arising from prior years, consideration of bankruptcy relief is an important tool worth reviewing.   Not only can taxes themselves be eliminated under the appropriate conditions, taxes which are not eliminated may be modified. A Chapter 13 filing offers opportunities to deal with non-dischargeable debts, eliminate penalties, reduce or eliminate secured tax liens, and/or make payment plans for the remainder of the debt far superior to what is generally available outside of Bankruptcy.  Therefore, prior to blindly entering any agreement with the IRS or the state taxing authority, consider a trip to a qualified Bankruptcy attorney.  It may be well worthwhile.